Trading in Asia Changes Bit by Bit

By

Alison Tudor

Dec. 16, 2012 4:37 p.m. ET

HONG KONG—In the corner of Morgan Stanley's trading room on the 36th floor of Hong Kong's tallest skyscraper, a small team of mathematicians and consultants monitor computer screens as stocks are bought and sold on behalf of investors. Dotted between the scores of traders sharing the 38,000-square-foot floor are empty seats.

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The computers handle more than half of all of Morgan Stanley's stock trading across the Asian-Pacific region, up from about 30% a year ago. Over the past 18 months, the Wall Street bank has cut staff from its Asian stock-trading operation by about 10% and added about 5% to the team of electronic-trading consultants.

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Singapore
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Morgan Stanley isn't alone in moving to electronic trading in Asia. At Goldman Sachs Group Inc., 42% of its stock-trading business is electronic in Asia, excluding high-frequency trading, up from 37% a year ago. Credit Suisse Group AG, one of the earliest adopters in the region, said its Asian-Pacific electronic trading accounted for 47% of orders, up from 42% last year.

Asia had been the last bastion of the stockbroker who advises both individual investors and institutional clients on what to buy in Asia's patchwork of stock markets and helps them navigate quirks such as the Indonesian exchange's longer lunch break during trading on Fridays. In the U.S. and Europe, electronic trading already plays a huge role in the market. Electronic trading accounts for about 70% of volume in the U.S. and about half in Europe, according to data provider Celent.

But Asia is catching up as investors look to cut costs. An electronic order in Hong Kong costs investors on average 0.05% of the value of the trade versus 0.19% for a broker to handle, according to data provider Greenwich Associates.

Rise of the Machines

Moreover, falling commissions have squeezed banks at a time of shrinking volumes and soaring technology costs. Trading volumes have been falling since 2009, according to the World Federation of Exchanges. Commissions on trading in Asian stocks dropped to $2.32 billion for the 12 months ended in September, versus $2.66 billion in the same period a year earlier, according to Greenwich Associates.

Among the largest banks, there is a race to become the hypermarket of electronic trading. Goldman Sachs Chief Executive Lloyd Blankfein said last month that the Wall Street firm aims to be a low-cost bulk-service provider in electronic trading.

As revenue has declined, banks have switched from adding staff in the Asian-Pacific region to laying off employees. Asia accounted for 23% of global staff cuts at the world's 10 biggest banks by revenue in the first half of this year, up from 8% in 2011, according to London-based data provider Coalition. Staff in Asian stock trading, which is banks' biggest business by revenue in the region, is shrinking faster than in fixed income and advisory divisions, Coalition said.

Some banks also have balked at the cost of major upgrades at a time of falling commissions, while others are cutting out duplication, such as Japan's Nomura Holdings Inc., which is retiring some trading systems and directing electronic trading outside of Japan to its Instinet unit. Nomura's move also resulted in some layoffs.

Andrew Sullivan is out of a job after Minneapolis-based Piper Jaffray Cos. closed its Hong Kong stock-trading business in August. But the 50-year-old Briton, who has worked as a stock trader in Asia for over a decade, remains upbeat. He said big, complex orders still need to be handled manually.

"There will always be a place for people who pick up the phone and the human touch. Algorithms can go wrong and crash, and they are only useful when markets are liquid," Mr. Sullivan said.

For those who specialize in electronic trading, work is piling up. Caroline Crandell, one of the 14-person electronic-trading team at Morgan Stanley in Hong Kong, markets and sells algorithms to investors and monitors how they work.

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Caroline Crandell, a member of the electronic trading team at Morgan Stanley, Hong Kong.
Samantha Sin for The Wall Street Journal

"Four years ago, I was covering six markets and now that's up to 11 markets, so there is a lot more to know on a daily basis," she said.

Ms. Crandell, a Canadian economics graduate in her 30s, has a more technical job than that of the traditional stock sales trader. She frequently works with mathematicians to tailor algorithms to minimize execution costs, a key consideration in Asia's thinly traded markets.

Her team leader, Zach Tuckwell, said: "We're creating a trading consultancy. Rather than telling clients what stocks to buy, we advise them on the best way to buy."

Spurring the spread of electronic trading besides its relative cheapness is greater speed and efficiency. Banks are linking national exchanges via high-speed networks, allowing clients to trade baskets of stocks across several Asian exchanges. Computer-driven trading accounts for just under half of all trading in Singapore, Hong Kong, Japan, Australia and India, up from an average of 11% in 2008, and is expected to hit 58% next year, according to Celent.

To be sure, the use of electronic trading differs across the region, given the peculiarities of each market. Credit Suisse said 70% of its business in Japan is electronic, with 40% in Australia and 20% in India.

"If you don't have a quality electronic product, you are severely disadvantaged this year as a lot of the volume has moved to electronic," said Gokul Laroia, Morgan Stanley's head of equities in Asia.

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